Essentially, a smart contract is a computer program that is embedded into a blockchain network. They operate according to “if/then” commands; if X, then execute Y.
A smart contract is the brainchild of the blockchain evolution. Despite still being in its primitive phase, blockchain technology has introduced the disruptive concept of decentralisation and showed how it can be used to solve different problems across a multitude of industries.
When Ethereum was introduced by Gavin Wood and Vitalik Buterin in 2015, it sparked the emergence of the second generation of blockchain — bringing new techniques and ideas to handle distributed ledgers. One of these techniques included smart contracts, which opened the blockchain's doors to automation.
To fully understand what a smart contract is, the first thing to know is that it is a program that is hosted on a blockchain network. In addition to the guarantee that data is protected from being tampered with, each contract has specific predetermined conditions that will trigger certain outcomes when met. Furthermore, smart contracts also allow parties to agree on results accurately and timely.
As they are not managed by a central authority, proper smart contract implementation offers an important infrastructure for automation. What’s more, they are shielded from single-point assaults made by malicious entities like hackers. Meanwhile, in multi-party digital agreements, smart contracts reduce counterparty risk, increase efficiency, reduce costs, and maintain transparency.
What Influenced The Need For Smart Contracts?
With the ever-progressing digital era, smart contracts have gained traction as the decentralised solution for preparation and execution of agreements. They are available for implementation among any two parties around the world. Not to mention, these contracts are accessible, easy to implement, transparent, and free of distance and geographical limits.
For example, a company based out of South Korea can ink a deal with another organisation from the U.S. without the need to physically travel and sign papers.
After both parties have reached a consensus on the terms and conditions, a smart contract is created. Once finalised, it will be executed on the blockchain network and be registered as a blockchain transaction.
What Can Smart Contracts Offer?
The primary advantage of smart contracts is the minimised risk that two parties, who might be total strangers to each other, take when they are involved in a digital agreement. This is mainly due to the possibility that either of the participants could abandon their end of the bargain (also known as “counterparty risk”).
Counterparty risks are mitigated through the use of centralised institutions, like banks, to uphold the contract’s terms. However, this design gives rise to another issue where the more prominent, centralized host can exercise authority over the contracts. Using smart contracts eliminates this possibility.
Besides eliminating the need for a third party, using smart contracts comes with the following benefits:
One of the key selling points of smart contracts is having the transaction run on the blockchain. This means that hackers cannot take advantage of vulnerable points. Moreover, within a smart contract’s conditions, no trusted intermediary can be bribed or otherwise influenced.
Smart contracts can increase efficiency for multiple parties with the help of automation of back-end processes. As a result, there's no need for manual data input, and no waiting for the counterparty to meet their end of the bargain — all while eliminating the need for intermediaries.
Besides providing a high level of reliability, smart contracts have their logic processed redundantly and verified by a decentralised network of nodes. Consequently, this gives the agreement protection against tampering. The high accuracy of smart contracts makes them much more reliable than other processes, as they virtually guarantee that the contract will lead to the desired result as intended.
Smart contracts prevent for-profit intermediaries from taking advantage of their position to make money. To achieve this, a decentralised network is called into action to provide and enforce the terms.
What Are The Use Cases Of Smart Contracts?
DeFi applications use smart contracts to streamline services and simplify processes. For instance, through smart contracts, users can hold their funds in escrow and give them away to others based on predefined conditions.
Individuals can use smart contracts to create, monitor and assign ownership rights to digital tokens stored on the blockchain. The tokens that these contracts issue have features and functions that are of good use to users.
NFTs And Gaming
The mass adoption of smart contracts is typically found in blockchain-based games like Axie Infinity, Nine Chronicles, Gods Unchained, and more.
A smart contract is a digital way of executing an agreement between two parties. It eliminates the involvement of third parties, cascades geographical barriers, and executes agreements swiftly and reliably.
Likewise, smart contracts over a blockchain can be tracked and managed safely, making them highly utile instruments.
Partly Sourced from: Crypto Daily UK